The Federal Reserve (sometimes called "The Fed") is a large central bank in Washington, D.C. that was founded in 1913. It lends money to other, smaller banks. The Federal Reserve Board is a group of financial leaders who work for the Federal Reserve and decide how much to charge these banks for borrowing money (this charge is called an "interest rate"). The Federal Reserve interest rate is decided by the Federal Reserve Board after studying the condition of the US economy.
When the economy is growing too fast, the Federal Reserve makes borrowing more expensive by increasing the interest rate, which means people and companies spend less, which discourages inflation. When economic growth slows, the interest rate is decreased so that borrowing will increase and there will be growth.
The primary motivation for creating the Federal Reserve System was to address banking panics. Other purposes are stated in the Federal Reserve Act, such as "to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes". Before the founding of the Federal Reserve System, the United States underwent several financial crises. A particularly severe crisis in 1907 led Congress to enact the Federal Reserve Act in 1913. Today the Federal Reserve System has responsibilities in addition to ensuring the stability of the financial system.
Current functions of the Federal Reserve System include:
- To address the problem of banking panics
- To serve as the central bank for the United States
- To strike a balance between private interests of banks and the centralized responsibility of government
- To supervise and regulate banking institutions
- To protect the credit rights of consumers
- To manage the nation's money supply through monetary policy to achieve the sometimes-conflicting goals of
- To maintain the stability of the financial system and contain systemic risk in financial markets
- To provide financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system
- To facilitate the exchange of payments among regions
- To respond to local liquidity needs
- To strengthen U.S. standing in the world economy
Images for kids
Ben Bernanke (lower-right), Former Chairman of the Federal Reserve Board of Governors, at a House Financial Services Committee hearing on February 10, 2009. Members of the Board frequently testify before congressional committees such as this one. The Senate equivalent of the House Financial Services Committee is the Senate Committee on Banking, Housing, and Urban Affairs.
Federal Reserve Facts for Kids. Kiddle Encyclopedia.